China's middle class will drive Macau's next gaming boom

For many investors—and gamblers—Las Vegas is the centre of the
universe. But Las Vegas is small stakes compared to Macau, the
island close to China that’s (by far) the world’s largest
gambling complex.

After a two year high-growth hangover, Macau’s gambling business
is on a roll again. But it’s not rich VIPs driving profits. It’s
China’s middle class—and a Las Vegas-like business
model.

A Portuguese colony until it was transferred to China in 1999,
Macau—like Hong Kong—is operated under the “One Country, Two
Systems” principle. So it’s governed by mainland China, but isn’t
part of China.

Gambling has been legal in Macau since 1847. But it wasn’t until
2002 that international casino companies were allowed to operate
there.

Gambling has long been a part of Chinese culture. So a nearby
island where gambling was legal – and that mainland Chinese could
easily visit – was in a great position to win big.

Even more importantly, Macau has also been the beneficiary of
China’s growing wealth. China’s middle class is expected to be 76
percent of the urban population by 2022 – that’s up from just 4
percent in 2000. That will be more than 550 million people.

And nearly 90 percent of gamblers visiting Macau are from Hong
Kong or China.

But after peaking in 2013, Macau’s gaming revenue fell 35 percent
in 26 months. But this August saw the island’s first
year-over-year monthly gain in revenues in two years – and it’s
been improving since then.

The decline of the VIP visitor

In Macau, casino customers are broadly split into two groups:
VIPs (“very important persons”) who have at least a few hundred
thousand dollars to gamble at tables where the minimum bet is
around US$500… and mass-market gamblers who sit at the US$100 (or
lower) minimum tables.

In the past, VIPs accounted for around two-thirds of Macau’s
casinos’ revenues. Just one VIP who bets US$10 million might
generate as much revenue as 1,000 gamblers who bet around
US$1,000 each.

The only problem is that many VIP gamblers all too often used
Macau gambling “junkets” to get around Chinese capital withdrawal
limits and to launder money.

With the help of junket operators, VIPs could easily transfer
millions of dollars overseas from Macau (while claiming the cash
was “lost” at the tables) – circumventing the official Chinese
government limit on currency that Chinese citizens are allowed to
take out of the country.

One report estimated that more than US$200 billion (or roughly
four times the GDP of Macau) was laundered through the island
every year through 2013.

In addition, “triads” – organised crime organizations –
infiltrated junkets, using them as a way to launder money.

However, as part of an extensive anti-corruption campaign led by
Xi Jinping, the Communist Party general secretary, a crackdown on
junkets began in 2013. Criminals were driven into hiding, and
many wealthy Chinese (and government officials) became very
skittish about ostentatious displays of wealth, so as not to draw
the attention of the authorities.

With visits and revenue from VIP high rollers sharply curtailed,
Macau gaming swooned.

Macau’s turnaround

That is, until recently. In August, Macau gaming revenue posted a
surprise year-over-year gain of 1.1 percent. Then in September
revenue was up 7.4 percent, followed by an 8.8 percent jump in
October, and a 14.4 percent increase in November.

Truewealth Publishing

Stronger VIP revenue, a more upbeat outlook for China’s economy, and
new resort openings have helped drive the improvement. A slight
softening of the Chinese government’s anti-corruption push –
though that’s difficult to quantify – may also have boosted
revenues.

More broadly, the slow shift in strategy by some casinos in Macau
is attracting more tourists. They are moving towards more of a
full resort experience, like Las Vegas, instead of an intense,
seedy, gambling-focused environment.

As we’ve discussed previously, the Chinese middle class is growing rapidly.
And one of the things this growing middle class will spend money
on is travel – not just to gamble, but also for fine dining and
live shows and family entertainment, all which Macau is
increasingly providing.

By one estimate, 300 million Chinese people are wealthy enough to
visit Macau. But only 25 million of them have ever visited. And
with the island’s ongoing transformation from a hard-core
gambling destination, to a gaming resort with middle class
appeal, Macau’s gaming companies could be in the early stages of
a long winning streak.

But casinos aren’t the only way to invest in China’s middle
class. We’ve discovered other exciting opportunities. You can
click here to learn more about “Project H”.